After rumblings since early 2015, finally in July 2015, news hit the world, that 140 year old electronics conglomerate, and “pillar of Japan Inc”, Toshiba had inflated profits by a stunning $1.2 billion for 7 years, with fabricated figures amounting to 30% of the company’s “profits” since 2008. The scandal ranks as one of corporate Japan’s biggest alongside the 2011 accounting fraud at medical equipment and camera maker Olympus Corp.

Weak Internal Controls
Toshiba’s internal control reports through to fiscal year 2013 have stated its controls were effective. The company’s auditor, Ernst & Young ShinNihon, also submitted statements vouching for the reports. But recent investigations have found nine instances of suspicious accounting in infrastructure-related areas, including smart meters and electronic toll collection systems. After the news Toshiba’s President Hisao Tanaka said “Our internal controls didn’t always function perfectly due to the importance placed on budget targets.”

This is a warning to Audit Committees who sometimes don’t consider internal control reports as important and fail to take action on matters highlighted.

Weak Independent Directors
Toshiba was one of the earliest companies in Japan to open up its board to outsiders. Toshiba’s 16-member board included two former diplomats, one former Morgan Stanley banker and a university professor as independent directors.

However, critics say the independent directors likely lacked the skills to contribute to strategy or rigor in oversight. Further, it is noted that former chief executives continued to exercise power, disrupting the exercise of power by other directors and weakening the role of independent directors. Generally, retaining former CEOs or Chairmen in the board could weaken governance.

Weak Nominations
An external panel is looking into the roles played by Mr Tanaka, chairman, Mr Sasaki, who was president from 2009 to 2013, and his predecessor Atsutoshi Nishida, who headed the company from 2005 and remains an adviser to the company. They’re said to have uncovered emails showing Mr Tanaka and Mr Sasaki instructing employees to delay the booking of costs to make the financial figures look better, according to media reports.

Nominating former chief executives and chairmen impede efforts to change old business practices and also uncover frauds. in Toshiba’s case such a practice extended the fabrication of accounts to over 7 years.